Axing merchant fees for bankcards may hurt lenders (2)

Increasing risks

The fee reduction threatens to increase the risks within banks' credit card loan portfolios in a number of ways. First, banks may try to accelerate volume growth to make up for the loss in fee income. Using the entertainment segment as an example, the reduction of merchant fee to 1.25 percent from 2 percent implies that banks would need a 60 percent jump in transaction volume just to maintain current income. This is far higher than the 36.6 percent growth recorded in the third quarter, and raises the risk that banks will adopt more aggressive competitive strategies, including lowering their underwriting and card issuance standards, to expand their volume.

Another risk is that banks may try to boost their bankcard fee income by promoting the usage of their cards for overdrafts or installment payments. Although credit card loans carry higher interest rates, the credit risk is also higher, given the customers who overdraft or borrow on the cards usually have weaker credit profiles.

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